The government affirmed its desire to see the private rented sector grow in last week’s pre-budget report, and announced that a consultation document will be issued early in 2010.

However, an analysis in the latest (2009/10) edition of the UK Housing Review published this week shows some fundamental changes will be required if that aspiration is to be met.

The rapid growth of the private rented sector over the past decade was supported not just by the advent of mainstream buy to let mortgage finance at competitive rates, but a uniquely favourable context of sustained economic growth, lower interest rates and rapidly rising house prices.
These circumstances have now changed. Diminished prospects for capital growth and limited revenue returns (just 3 per cent in 2008 according to the latest IPD Index) argue against new investment by private landlords.

And in these less favourable circumstances, the tax system’s underlying bias towards owner occupiers could emerge to once again tilt the balance away from private renting. That bias was reduced - but not removed - by the abolition of mortgage interest tax relief for homeowners in 2000.

Unlike homeowners, private landlords are subject to capital gains tax, and they also pay tax on the net rental income from their investments.

Homeowners, in contrast, pay no equivalent tax on the use-value of the homes they occupy. In effect, by taking the benefit of their investment in kind rather than in cash (as a rent) they avoid taxation.

The analyses in the UK Housing Review show that the value of those tax benefits to homeowners rose to around £21 billion in 2003/04, before falling back to £13 billion in 2008/09.

While homeowners do pay some housing taxes - such as stamp duty and council tax - they are levied in respect of dwellings in all tenures and do not therefore give rise to any equivalent fiscal bias.

There are no immediate prospects of any UK government fundamentally reducing these tax reliefs for homeowners; but they need to be counterbalanced if the government wants to ‘grow’ the private rented sector.

But government also needs to think clearly about the type of private rented sector it wants.

There is continued lobbying in favour of large institutional landlords, despite the evidence from the 2008 Rugg review that their tenants were no more satisfied with their living conditions than those of small landlords.

The stronger case is for tax incentives that would promote the supply of better quality dwellings, and enhanced security of tenure, rather than focusing on the institutional character of the landlords.

Professor Steve Wilcox is the editor of The UK Housing Review 2009/10, which is available from the Chartered Institute of Housing

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